An informed and thought-provoking analysis of what lies behind the headlines and headaches of business ethics and corporate social responsibility

Wednesday, September 1, 2010

Why the Wall Street Journal is wrong about CSR

Our friend, colleague, and fellow blogger over at the University of Western Ontario, Mike Valente, has just posted a very informed and thought-provoking response to last week's rather incendiary article in the Wall Street Journal about why CSR is misguided. As you'll see from the 200 or so comments on the WSJ comments page, the original piece did not pose a particularly convincing argument, and as far as we're concerned, nor was it a very insightful one either. Over on his Business and Sustainability blog, Mike helpfully provides some good clear analysis of why the author is wrong, some of which we've re-posted below. Mike also says where he agrees with the article too, but you'll have to go to Mike's original post to read that. We just like the argumentative bits.

It's great that Mike took the time to write this reply. When we first read the WSJ piece, Andy's deeply thought through response was, "this is suspiciously crtpyo-Friedmanite - he seems to think the world hasn't changed in the last 40 years". Dirk's was: "this guy is in cloud cuckoo land regarding the role of government". We didn't get much further than that.

So here's a extract from Mike's post:

Where I Disagree

1) Business as Passive Recipient: My greatest concern with this article is the author’s presumption that business merely represents a passive recipient to market and regulatory trends as reflected in his examples of the auto sector and health food sector. We’ve known for quite some time though that companies have played a proactive role in shaping the market and regulation for food, vehicles, and many other products and services. General Motors played a very influential role in curbing government imposition of taxes on gasoline so that larger gas-guzzling vehicles would still be attractive to the market. The private sector’s role in ‘killing’ the electric car was, according to many, not a result of any lack of market demand but the preservation of corporate interests, suggesting that business exercises the power to build and dismantle markets. So while I agree that companies will respond when the market demands change, I disagree that companies sit by idly in response with no influence on this market through political lobbying or strong marketing.

While it is true that companies have adapted to the changing demands of consumers in, for example, healthier food, this was not without strong corporate interest in preventing such trends through strong lobbying for regulation that supports practices that undermine the health of consumers. Examples here include the subsidization of corn and soy to support the processed food industry and the strong lobbying for the allowance of trans fat in food. And as an aside, the author’s argument that social activists have had little impact on changing company ways is unfounded. Many would argue that civil society organizations, non-governmental organizations, and activists play an important role in shaping market demand and consumer behaviour in spite of corporate efforts to preserve the status quo. Consider Greenpeace’s ability to catalyze a massive boycott of Shell in 1995 or the Asian-American Free Labor Association’s ability to boycott Nike products in early 1990s. More recently, the New York Times reported that banks are becoming more wary about lending to mining companies in light of growing criticism by environmental advocates such as the Rainforest Action Network and Sierra Club.

2) Business as a Political Actor: I would argue that there are indeed situations when firms are best positioned to respond to social and ecological issues regardless of the relevance to business operations. This is especially the case in the global south where substantial public service gaps exist and companies have stepped in to fill governmental roles like, for example, the efforts of several multinational corporations in Kenya to address public service gaps after the post-election conflict in 2008. While I agree that in an ideal world, government or other public bodies may be best positioned, in reality these actors are not always available and it is instead business that finds itself better positioned (see Private, but Public WSJ, 2009). Regardless of the reality of the situation, the article implies that companies should stand by and do the responsible thing which is to continue with daily operations that maximizes profitability when its surrounding communities don’t, for example, have access to food and water.

But governmental gaps exist as a consequence of an increasingly complex socio-economic environment rather than because government has lost its capacity. Similar to the economic models that are built upon a ‘theoretical’ assumption of perfect competition, the ideal scenario of which the author speaks may not exist, however logical his argument might be. So while it is true that, in theory, “governments are a far more effective protector of the public good”, the reality is that their ability to do this is waning when we consider the rather pervasive loss of power of government to regulate and provide public services, the ability of corporations to transcend state level regulation, and the growing privatization of public services. We can either keep beating a dead horse and try to revert back to a simplistic design that relies on the separation of the public and private sectors or we can begin to adapt to the reality that these lines are blurred and business might have to be involved in the solution to these problems. This is a frightening thought of course because it suggests that a profit-making entity is influencing public discourse. The truth is that this has been happening for quite some time. Perhaps our efforts should be directed to understanding this growing phenomenon, building theories to guide it, and advising managers and policy makers how to use it to align corporate and public interests.

3) Managerial Choice to be Part of the Solution: Even when activists, NGOs, and civil society groups do exist to address some of these issues, we find that business is typically brought in as part of the solution. Many unique business models of the global south represent innovative responses, suggesting that business is not merely a passive recipient to market trends but an active player in the solution to these issues. The point is that firms represent architects in finding ways to align profit with social goals. This gets to an important presumption that the author makes regarding the view that managers do not have control over the alignment of profit with public goals and that factors beyond its control determine this alignment.

Exemplary scholars like Ed Freeman argue that it is the responsibility of business to migrate to areas that ultimately maximize value for multiple stakeholders, including shareholders, concurrently. Put another way, managerial options may not be limited to being responsible on the one hand and sacrificing profits on the other OR vice versa. A manager’s job is to think outside of the box to understand how profit maximization can take place in conjunction with the maximization of value for different stakeholders; stakeholders who represent social interests. So, for example, let’s say an automotive manufacturer is pondering their next line of vehicles to be designed and manufactured. The author’s view is that the firm can do one of two things – either ‘responsibly’ make a green car at the expense of profits because no market yet exists or maximize profitability and make an SUV where the market currently resides. As already mentioned, companies have a very strong ability to create new markets and influence public policy in a way that shapes society’s behaviours. To Freeman and others, the challenge of business is to find a way to make responsibility (or ethical behaviour) and profitability commensurable. So being responsible here may involve pushing for regulation that supports sustainable vehicles and building marketing campaigns that educate the market about such products and thus make such strategies profitable.

In sum, the views put forward in the WSJ article, while relevant at a time when public and private roles were distinct and clearly defined, are quite outdated. It may be time to let go of the theoretical niceties associated with pigeonholing roles and responsibilities to different actors and recognize that the blurring lines between them may represent a future reality that requires the attention of managers, business scholars, and policy makers.

2 comments:

CSR indeed means different things to different people!Just as a view from the mountain top is different from the view from the bottom of the mountain, the interpretation of CSR is dependent on one's vantage point. My interpretation of CSR is business organizations taking responsibility for the negative impacts of their activities on society. My view of course is informed by the realities of my current environment. Society has the power to reward good business behaviour and to punish bad behaviour. A corporation that pursues profit at the expense of society would be worse off in the long run. For economically advanced societies with strong democratic and legal structures, excesses of corporations are trimmed. This is not the case for societies with weak democratic and legal systems. Asking corporations to be socially responsible makes a world of sense in societies were laws and regulations are not enforced due to weak governance structures. Multinational corporations have a field day in such societies. Subsidiaries of multinational oil companies operating in the oil producing Niger Delta region of Nigeria would be in a better position to describe what happens when corporations behave in socially irresponsible manner. Of course they wont admit any wrongdoing, but they are paying dearly for not taking their social responsibilities seriously. CSR is an idea that makes more sense in undeveloped, undemocratic, but natural resource rich countries. Dr Aneel Karnani views on CSR would be more balanced if he looks at global businesses in the southern parts of the globe.

Thanks for posting this. I went to an event yesterday evening at McGill entitled Energy, Oil Sands and Sustainable development where the speaker was CEO of Total. (http://www.mcgill.ca/channels/events/item/?item_id=167276)

I spoke with a fellow student of mine after the event. She, who studied sustainable development in her previous undergrad (or masters, can't remember) told me quite a bit of what was written in WSJ in terms of how business frames CSR as the bottom line. I'm not sure if there's really a way to "disprove" the point that businesses act in their best interests for the bottom line. It's like arguing that all actions by humans can be linked back to self-interest. You can always draw the lines to show that everything benefits oneself.

Moreover, what I found interesting from the speaker itself was that, when a second question asked about the influence of lobbying and whether Total would lobby for carbon cap and trade/CO2 taxes in Canada given his company's commitment for sustainability, he seemed to push the blame to government - that business was a player being regulated by government. He then continued on about European standards being higher than North Americans and drifted onto saying North American politics needs to care more about environmental effects. Though he dodged the question, he did imply that business is a passive player, only under regulation by government (and will follow as suit).

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Andrew Crane [L] and Dirk Matten [R]

Welcome to the Crane and Matten blog - for informed commentary and expert analysis on the everchanging world of corporate responsibility.

We are two business school professors best known for our books and research articles on business ethics and corporate citizenship. We wrote the Crane and Matten blog from 2008-2015, offering unique insight on a range of issues from across the globe.

Andrew Craneis Professor of Business and Society in the School of Management, University of Bath.

Dirk Matten is the Hewlett Packard Chair in Corporate Social Responsibility in the Schulich School of Business, York University.